GE Is Back to Firing on (Most) Cylinders

After being hamstrung by the financial crisis and Great Recession, General Electric (NYSE:GE[1]), the bellwether sprawling conglomerate, looks to be back to its winning ways.

The Dow component has been in a tizzy of activity over the last few years getting its various businesses in order — especially the financial arm of GE Capital — and its latest quarterly results show the moves are paying off.

GE beat Wall Street’s second-quarter earnings estimate by a penny a share, and it maintained its outlook for the full fiscal year — and that’s despite the hit its European operations are suffering amid the continent’s economic woes.

Yes, profit slipped 16%, but that was widely expected and not as bad as analysts feared. Revenue ticked up 2%, just shy of Street forecasts.

But most heartening are the company’s core businesses, both of which posted strong profit gains. Finance and energy account for nearly 70% of GE’s revenue, so it’s critical that the conglomerate gets power from those twin engines.

More impressive were the figures out of the finance unit, GE Capital, where robust results in real estate financing led to a 31% jump in profit.

As has been evident in results from banks[2] like Wells Fargo (NYSE:WFC[3]) this earnings season, record-low interest rates are prompting a surge of new mortgages and home refinancing activity[4].

It’s the latest bit of good new for GE’s finance arm, which did so much to hobble the company during the financial crisis. GE passed a major milestone back in May when it said GE Capital would start paying a dividend[5] to its corporate parent for the first time since 2009.

GE Capital offers loans, leases and financing, and was a hot profit-maker back in the day. But it quickly turned into a drag when the economy slowed and the financial system nearly collapsed.

And now it’s back to boosting results and the company’s coffers. GE Capital paid a total of $3 billion in dividends to GE during the second quarter. That’s key, because capital-intensive companies like GE can never have enough cash. The company doesn’t just need cash for its generous 3.4% dividend and $12 billion share-repurchase program — it has been doing big deals, too.

True, GE did hit headwinds during the quarter. A stronger dollar reduced revenue by $900 million. With the euro in crisis, that drag may persist. Additionally, infrastructure orders declined year-over-year, hurt by a sharp drop in demand for wind turbines. And margins contracted in the industrials segment.

What’s heartening, however, is that GE was still able to target double-digit-percent earnings growth for the full year. That’s a big boost of confidence given the company’s sensitivity to the slowdown in Europe.

Perhaps best of all, shares in GE are up nearly 12% in 2012, beating the broader market by about 3 percentage points, but they still look to offer compelling value. The stock trades at an 18% discount to its own five-year average on a forward earnings basis. It also trades at just a slight premium to the broader market, despite having stronger growth prospects.

As we said back in May, GE looks like a good long-term bet[6]. It’s a pro-cyclical play that’s more than holding its own through a tough macroeconomic environment, and the fundamentals are the best they have been in years.

As of this writing, Dan Burrows held none of the securities mentioned here.